Reference no: EM132184751
Management Accounting - Relevant Costs: The Key to Decision Making
The Brain Teasers (TBT) specializes in creating and manufacturing board games for youth. Each game has a unique game board to accompany the other pieces of the game. The company is at the final development stage of a new game called "Inverted World" based on a recent fictional book and subsequent film of the same name. Since it is important that the game be on the shelves quickly to capitalize on the advertising and promotion done by the movie studio for the film, the manager of TBT is considering an offer from another game manufacturer to supply the game boards for $5.60 per board. This is a common practice in the game industry as the life of a toy is very short and there is a need to act quickly to get the product to market before demand shifts.
TBT's cost accountant has developed the following cost estimates for the production of the game board:
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Cost per Unit of Inverted World
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Direct material
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$3.20
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Direct labour
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0.80
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Production overhead
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1.98
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Corporate overhead
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0.48
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Cost of game board
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$6.46
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The accountant has also provided the following information:
The board can be produced using current machinery that has a capacity to produce 500,000 units per month and is 50% utilized.
The anticipated demand for the game will not exceed 50,000 units a month, according to the sales team.
Half of the production overhead is fixed.
The corporate overhead allocation is based on 15% of the direct materials charge.
Required -
Compute monthly net benefit of making the game boards than buy the game boards from the competitor.
State whether TBT should make the game boards or buy from the supplier.